As tax season gets fully underway the questions and debates around crypto taxes are set to only increase in importance. With an estimated 59 million U.S. taxpayers having owned or traded crypto at some point the reality is that crypto tax questions are going to become part of mainstream tax planning and preparation. Especially with changes to IRS Section 6045 and 6050I complicating tax reporting and compliance, the opportunity for informed and motivated CPAs continues to grow. It is also worth pointing out that, although the IRS is not typically known as a technology leader, that the Service has invested significantly into building crypto tracking and tax collection tools.
Further adding to the importance of crypto tax planning and preparation is the growing scope and penetration of stablecoins into the mainstream conversation. As investors seek, and increasingly have, exposure to more stable forms of cryptoassets – including the much discussed spot ETF launches that occurred in January 2024 – the reality is that CPAs are going to need to increase awareness and expertise around crypto tax issues. Even as politicians continue to put forward hostile and incorrect rhetoric toward crypto applications, TradFi institutions continue to invest and deploy tokenized payment solutions across the board. Stablecoins, no matter what label is applied, continue to increase in importance.
Regardless of which perspective the crypto world is analyzed, the fact remains that investors need to be aware of 1) crypto trends, and 2) what CPAs should be asking this tax season. Let’s take a look at a few of them.
Where The Crypto Activity Comes From
For any crypto investor or entrepreneur seeking to use cryptoassets for business purposes, one of the first questions that a well-versed CPA should ask is where this activity is coming from. Specifically, if the taxpayer is a crypto trader/investor follow-up questions should include questions around the exchanges utilized, the jurisdictions of these exchanges, and what the access policies around these holdings are. This is a question that is not only important, but can also provide an educational opportunity for both the CPA and taxpayer in question.
Even though from a user experience perspective there may not be obvious differences between exchanges, from a tax reporting and payment perspective there are several considerations that need to be addressed. Examples of this include cost basis tracking, the tracking of individual trades and the units involved therein, and the reporting of this information. These can make significant differences from a tax liability, or how much the payer owes, and should be one of the first items discussed during tax preparation.
What Cryptoassets Are Being Used
Another item that a well-versed CPA in crypto terminology and crypto trends should inquire about is related to which specific cryptoassets are being used by the taxpayer. Setting aside the tax implications of crypto transactions, the differences that exist between the various subsets of cryptoassets are worthy of discussion between the taxpayer and CPAs. This is another opportunity for CPAs in the crypto space to not only provide pertinent tax advice, but to also educate taxpayers on these topics.
For example, with the recently passed FASB update pertaining to cryptoassets, companies that hold bitcoin and other qualifying cryptoassets on balance sheet will now mark those assets to market value, versus holding them at cost less impairment. For NFTs, on the other hand, CPAs should be asking investors about the specific structure, rights, and obligations that the NFTs convey to both creators and current holders. Stablecoins, conversely, should generate questions from crypto CPAs around the reserves, reserve reporting, and transparency around these reserves.
How Record Are Managed
Any crypto investor who has experience in the crypto sector should be well aware of how critically important good record keeping and transactional record keeping are. Especially with tax enforcement and other regulatory pressures on the upswing, crypto focused CPAs should be paying special attention to how clients are handling and storing this information. For example, CPAs that have crypto clients should pay special attention to 1) how many wallets a client has that are used for transactional purposes, 2) if other taxpayers have access to these wallets, 3) if so, how is this access managed, 4) are cold wallets deployed to assist with longer term holdings, and 5), is the a process to track cross-platform transactions?
Clearly CPAs are not able to supervise every action taken by a taxpayer throughout the year, but this is another area in which crypto CPAs can offer direct advice as well as serving as an educational sounding board.
Tax season, and the crypto questions therein, and going to be a headline topic for the next several months. Investors should educate themselves, and know what questions CPAs should be looking into this filing season.
Read More: Questions That Crypto CPAs Should Be Asking This Tax Season